hedge funds forex

Trade like a Top Hedge Fund in Forex

How Hedge Funds Trade the Forex Market

Unlike small individual investors and traders who are strongly enticed (by brokers) to engage in very high frequency trading, successful hedge funds engage in fundamentally based, well researched long term objectives where they may trade on multiple time frames according to the overall long term price trend they expect.

They do this by trading slowly, much slower than most day traders, and by trading very big size).  They take a very selective approach which may provide opportunities in different countries and currencies based on their geopolitical and economic analysis in that particular region.

 

The Carry Trade Strategy

The Carry Trade strategy involves selling a low interest rate currency and buying a high interest rate currency, is like borrowing money from a low interest bank and depositing it with a high interest bank, it generates constant profits even if the currency pair in question doesn’t move at all. But it is also an open forex position which if predicted right it will also make a big profit on the price movement, or a big loss if predicted wrong, this profit or loss will be much bigger than the profit made from interest.

So good hedge funds make sure they predict their Carry Trades, with risk, but it’s calculated risk and they hedge this risk through other currencies or through instruments on other currencies or even commodities. For example, a Carry Trade on the Canadian Dollar, or US dollar can be (partially at least) hedged against big risk by taking an appropriate trade on Crude oil,  or some other commodity.

Canadian dollar is correlated to crude oil,  while the US dollar is correlated to other commodities, inversely correlated to crude oil for moderate movements and actually correlated to crude oil for large, sustained price movements. Hedge funds do their geopolitical and fundamental analysis homework on these factors, and they will implement a Carry Trade in the safest way possible.

 

Every Country is Unique

Successful hedge funds don’t engage in generic investment ideas,  they do research and analysis seeking to spot untapped markets, they take into account all kinds of relevant factors,  especially data such as imports/exports relating to a country’s economic strength and future demand for its currency.

Canadian dollar is correlated to crude oil because Canada is a big oil exporter with huge untapped reserves, these reserves are only worth extracting as long as the price of crude stays above a certain level, if crude price drops significantly then Canada’s reserves in oil sands will become worthless once more and other countries such as Russia and Saudi Arabia will gain larger market share. It is things like these that hedge funds have to predict before investing in a country’s currency.

So in our example,  there’s no guaranty that crude oil price will keep on rising and rising, a sudden breakthrough in physics such as the invention of cold fusion will completely crash the oil market once and for all, since cold fusion can provide astronomical amounts of clean and cheap energy and crude oil use will be limited to raw materials manufacturing only. This is an example of how risky markets are and how seemingly safe long term commodity investing can crash at any year, thereby crashing the related currencies with it.

Canada stock market history

History of the Canadian Stock Market

The Canadian financial market is made up of:

  1. The Toronto Stock Exchange (TSX): This is the main stock market in Canada. The TSX is presently the only exchange that is used for trading stocks classified as “senior equities”.
  2. The Montréal stock exchange, also known as the Canadian Derivatives Exchange, is the exchange where derivatives are traded. Derivatives include futures, options and forward contracts.
  3. Canadian Venture Exchange (CDNX) was created via the merger of the Vancouver, Alberta and Winnipeg exchanges for the trading of stocks classified as “junior equities”. Junior equities will include stocks of companies that have been created via venture capital or start-up capital.

At the end of 2003, the TSX was home to 1340 companies representing a total market capitalization (number of shares outstanding times share price) of some $1.3 trillion.


History

For the purpose of this discussion, the Canadian stock market will refer to the Toronto Stock Exchange (TSX). The origin of the TSX can be traced back to 1852 when 12 businessmen formed an association of brokers. However, official recording of trades did not occur until nine years later, when on October 25, 1861 an official resolution was passed by a group of 24 at the Masonic Hall in Toronto. At this time, trading was only performed on 18 securities in the banking and real estate sectors. Trading was also restricted to 30-minute sessions. Membership of the exchange at this time cost $5, eventually rising to about $250 per seat in 1871. 14 firms had seats on the exchange at this time. By 1878, the legal framework for the TSX was developed by an Act of the Legislature in Ontario, making the TSX the second official stock exchange after the Montreal Exchange.


1900 – 1950

By 1901, the cost of getting a seat had increased to $12 000, with trading volumes hitting a million shares in every daily session. At this time, 100 companies had seats on the exchange. By 1913, the TSX moved into its first owned building on Bay Street, introducing the printout tickers on which trading prices and stock quotation prices were printed for the first time. However, the onset of the First World War truncated the pace of advancement of the TSX, and operations had to be suspended in July 1914 for three months. When trading resumed, market speculative activity increased and by the end of the war leading into the 1920s, the market depth grew as the number of shares traded on the TSX to over 10 million shares annually in 1929.

The market crash of 1929 left the TSX relatively unscathed. 1936 saw the TSX emerging the 3rd largest exchange in North America with annual trading volume in excess of $500 million.


1950s to 2000

Roughly 100 years after it first opened its doors, the cost of a seat in the TSX was now 20,000 times more expensive than the first offered price of $5. At the same time, the formal disclosures requirement was introduced to collect information from listed companies on fundamentals which could affect their price movements. By this time, more than a billion shares were being traded annually.

By the 1970s, the TSX introduced computer-assisted trading, creating the TSE300 Index. 1987 saw the creation of the Toronto 35, but the October 1987 market crash caused the value of the TSE300 Index to fall nearly 12%, losing market capitalization of close to $37 billion.

The late 1990s saw a number of firsts for the TSX.

  • decimal trading was introduced in 1996, making the TSX the first exchange to stop using from fractions in price quotations.
  • In 1997, it also completed the migration to a fully electronic trading environment, becoming the first exchange in North America to do so.
  • Appointed the first female to ever preside over a North American exchange.

Diversification of trading function as part of reorganization of the exchange occurred in 1999, with the Alberta Stock Exchange and Montréal exchange now focusing on derivatives trading while the TSX became the major exchange on which senior stocks were traded. The same year, the TSX obtained a vice-regal assent to operate as a profit-making organization, which paved the way for the public listing of the company in 2002.


2001 – Present

Trading volumes hit over $100 billion for the first time in March 2000 and by 2002 Standard and Poor’s took over the TSE 300 index, becoming known as the S&P/TSX Composite Index. In 2001, the TSX acquired the Canadian Venture Exchange and renamed it the TSX Venture Exchange, which serves as the incubation ground for companies just starting out as public companies. From here, companies can apply to be upgraded in listing to the TSX when they have met the requirements. In April 2002, the Toronto Stock Exchange was officially rebranded as TSX.

2005 saw the total value of trades on the TSX surpassing $1 trillion for the first time. In 2007, the TSX Group and Montreal Exchange merged to form TMX Group and the next year, a change in nomenclature from the TSX Group to TMX Group occurred.

Today, about 4,000 companies are listed on the TMX Group, making this exchange the second largest in the world in terms of number of listed companies.  It also has the largest number of listed mining companies in the world, and operates all the Canadian stock markets, energy markets (via NGX Canada Inc.), and re-sells market data via its TSX Datalinx company, which also provides services and tech products to other clients.

Forex History

Key moments in the history of the Forex Market

The foreign exchange market as known nowadays found its roots by 1973. Even if the money in their diverse forms were used from ancient times, from Pharaohs and Babylonians, from Middle Eastern that were the first to change the money and became currency traders, the forex market remained in incipient stages for centuries till the 20th century. During this period this type of activity was practically insignificant, stable and without speculative action.


1875 – Gold Standard System Introduction

International payments were made before this date, using precious metals like gold and silver. But there was a major inconvenient:  the value of the gold or silver was subject of external demand and supply. The Gold Standard brings to light the notion of currency backed by gold, meaning the currency was converted to a certain amount of gold, a guaranteed conversion as established by governments. So the exchange rate between currencies translated into differences in the gold price. This was the first standard of the foreign exchange.

World War I is the moment that trigger important changes and entails development of this market, as the volatility increases and  the speculative operations explode. But the decline of the gold standard starts as the gold reserves cannot hold the rhythm with the velocity of currency printing and the huge majority of countries renounce of using it by the end of the World War II. Even if obsolete, the gold remained a safe heaven and the ultimate level of money value.


1944 – Bretton Woods System – Fixed exchange rates

Once the Gold Standard abolished, the necessity of new rules appeared, so after the war the winning nations met at Bretton Woods and established a new order: fixed exchange rates method was instituted, U.S. dollar became reserve currency and replaces the gold standard, and international institutions with economic prerogatives are created: the International Monetary Fund, the International Bank of Reconstruction and Development. So, the dollar became the new star of the foreign exchange market, it was the only currency pegged to gold at a price of $35 per ounce, and the rest of the currencies pegged to the dollar. This system was meant to rebuild the economies after the war and supply stability. The objective was accomplished, but the fixed exchange rates system arrived to its end by 1971,, when it was obvious that it didn’t correspond anymore to the economic realities.


1976 – Jamaica Agreement – Free float exchange rates

The final conclusion was that the currencies should float freely. Anyway some countries adopted a sort of intermediary version and not a pure free floating system, like: managed floating rate, pegged rate or dollarization. Pegged rate means that a country decides to fix its national currency to a foreign one (for example the Chinese Yuan is pegged to the U.S. dollar); dollarization is the use of a foreign currency as its own national one; managed floating rates means the free float is allowed, with some interventions from the Central Bank if extreme situations appear.

This system was used the last decades and is still in use today.

All these events concluded to an enormous market that today may be considered the closest to the ideal market concept, if we ignore central banks sporadic interference.

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Is Cash Value Life Insurance a Good Investment?

When you buy life insurance, you have a choice between two main categories of insurance: term and permanent. A term policy just provides a death benefit if you die. A permanent policy often offers something called cash value on top of its death benefit. This is money you can take out and spend while you are alive. As a result, many insurance salesmen market cash value life insurance as a good investment. Is this a worthwhile account for your money? Let’s take a look in more detail.


Cash Value Growth

As you pay for permanent life insurance, some of the money toward building up your cash value. The insurance company then invests your cash value to grow your account balance over time. Regular whole life policies offer a guaranteed, fixed rate of return similar to an investment in bonds. Variable insurance policies invest your money in the stock market. They have the potential for higher growth but could also lose money. When you buy your insurance policy, you need to decide how you want your cash value invested.


Taxation

One of the key investment benefits of cash value insurance is that your investment gains are potentially tax-free. Permanent policies let you take out your money as a policy loan. When you take money out as a loan, your investment gains aren’t taxable. As long as you keep paying for your life insurance, you don’t need to pay back your loan. When you die, the outstanding loan will just get deducted from your policy death benefit. Since death benefits are also tax-free, this gives you a way to completely avoid taxation on your insurance investment gains. This is a rare tax benefit as the Roth IRA and municipal bonds are the only other accounts that also give tax-free growth.
Investment Return

The rate of return for investments in life insurance will always be lower than the rate of return for the same investments outside of life insurance. This is because a portion of your money each year needs to go towards paying for the insurance premiums. While the tax-free return makes up for some of this difference compared to taxable accounts, when compared to a tax-free account like the Roth IRA, cash value life insurance has a significantly worse return.
Permanent Life Insurance

When reviewing cash value life insurance as an investment, you shouldn’t forget that it also offers permanent life insurance coverage. As long as you pay for your insurance premiums, your coverage never expires. Term policies have a set expiration date and if you outlive your contract, you lose coverage. If you plan on needing life insurance for many years, permanent coverage is the way to go.


Bottom Line

As a pure investment, cash value life insurance is not as good as other retirement accounts, particularly the Roth IRA. The drag of insurance premiums lowers your return too much compared to your other options. However, if you also need long-term life insurance coverage, cash value growth is a fantastic extra feature on top of your life insurance protection.

Kind of trader

What Kind of Trader Are You?

Out of the around 8 billion people in the world, no one is the same as the other; even identical twins do not have similar fingerprints. Every person is unique in his or her own way.

Trading is not any different. Because of our unique personalities and different ways of doing things, our approach to the market also differs.

While one person can show preference to a more aggressive trading style, another person may like waiting for hours before targets are hit.

Here is a description of the four main trading styles that will assist you know the kind of trader you are.

  1. Scalpers

Scalpers open and close positions in the market very quickly, normally lasting for about 3 to 5 minutes. Usually, traders who use this strategy accumulate profits as many times as possible over the course of the trading day.

The objective of scalpers is to make profits very fast before the market changes course. So, it’s regarded as a safe way of trading the forex market because the short period of time a trade is opened reduces the exposure to market risks.

If you are someone who is thrilled at getting quick returns and you are impatient glaring at your screen for a long time for a trade to materialize, then it implies you are meant to be a scalper.

  1. Day traders

Day traders, as the name suggests, trade only for the day; that is, taking trades during the day and exiting them when the day is over.

Typically, this type of traders will not hold their positions overnight and they’ll do their best to quit any open positions before the session closes.

If you have sufficient time during the day to analyze, execute and keep an eye on trades, then you should fall in love with day trading.

If you find scalping to be very swift and swing trading a bit slow, then day trading could be your best alternative.

  1. Swing traders

Swing trading involves holding on to open trades for some days, even a few weeks. Since it’s a long term trading style, it’s suited for those who are not able to analyze the market over the course of the day but can allocate some hours each night looking for potential opportunities to enter trades.

If you want to profit from trading but you don’t have enough time to stay close to the market maybe because of work or school, you can adopt this trading style.

In swing trading, traders look for medium term trends in the market and open positions when there are high chances of making profits.

  1. Position traders

Position trading is a reserve for a few: only those who are extremely patient and can hold on to trades for some months, or even years.

It’s the longest term trading style and requires an elaborate understanding of the fundamentals before taking trades.

So, for you to be a position trader, you need to develop thick skin because trades may work against you even after holding on to them for a long time.

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Advantages and Disadvantages Of Investing In Bonds

Bonds are one of the most widely used investment tools of the 21st century. For many investors, buying bonds and holding them till maturity has become the most basic type of financial investment which earns a return. The simplest way to understand Bond Investments is to think of them as giving a loan.

The issuer of the bond usually needs to raise a certain amount of money. To do so, it gives out bonds to investors in exchange of money. The price of the bond is equal to the investment made, and once the bond matures at a future date, the issuer promises to return the principal amount as well as interest on it.

Bonds are issued by governments, private sector corporations and public sector organizations as well to raise money for different lengths of time.

Pros of Bond Investing

The reason bond investing has become so common and widely used is because bonds have several advantages over other kinds of financial instruments.

  • The biggest advantage of investing in bonds is security. Bonds are a secure mode of investing because they pay fixed interest payments and give a return on a fixed date. If all  conditions remain constant, there is very limited risk in bond investment because all rates and payments are pre-planned.
  • Bonds pay a high rate of return compared to some  investments. For an investor who gives his money to the issuer for many years, the rate of return represents a compensation for tying the money away. Savings accounts also have interest payments; however, these are lower compared to bond payments. So, the higher the interest, the happier the investor.
  • Bonds are sometimes exempt from tax payments. This means that the investor does not have to pay tax from the total return generated on the bond. Municipal bonds are an example of this type.

Cons of Bond Investing

Just like any other investment, bonds also have some disadvantages.

  • When compared to real estate and gold investments, bonds give a low yield. So while they are secure, people who want to double their investments in a short period of time do not put money in bonds.
  • Bond investments have a risk attached to them when there is a chance that the issuer of the bond may declare bankruptcy. This risk increased manifolds during and after the financial crisis of 2008. When such a situation occurs, an investor is not paid interest and he also loses his original investment as well.
  • The opportunity cost of investing in low yield- long term bonds is quite high. Let’s assume that you have invested in a long term bond that has a duration of 20 years. During this period, if interest rate on banks and other investments increases; you will be unable to take advantage of it because your money is tied up in the bond investment.

It isn’t only bonds that have these disadvantages. Every investment tool and strategy presents different opportunities and threats. However, what determines success is the timing and purpose of a bond investment.

 

Investment Club

Advantages and Disadvantages of Participating in an Investment Club

An investment club refers to a group of like-minded individuals who join hands and pool their resources in order to meet their investment aims such as investing in securities and real estate.

Participating in an investment club always has some advantages and disadvantages.


Advantages

  • It provides the opportunity to access minimums

Currently, making a significant investment is difficult if you do not have enough money. However, when a group coalesces and pools its resources together, the collective wealth gained breaks the ground for investment avenues that would otherwise be not possible to any member independently.

With an investment club, there is also higher bargaining power to access discounts and other benefits that comes with larger investments.

  • No man is an island

In this world, no man is an island; you can’t be self-sufficient without relying on others for support and encouragement.

When it comes to the world of investment, an investment club does the trick here, as it enables members to share their load and combine their knowledge to make better informed investment decisions.

If you start participating in an investment club, you’ll be interacting with other like-minded members who are equally enthusiastic to make their money work for them.

Instead of struggling on your own, you can capitalize on the benefits of an investment club to reduce your investment risks, gain from others and have an enjoyable investment experience.

Investment Club


Disadvantages

  • Lost independence

If you are financially involved with other individuals, it implies that you will no longer enjoy the capacity to make investment decisions on your own.

Before making a decision to invest, all the members must be consulted and this may cause unnecessary delays in profiting from quick lucrative opportunities.

Worse still, if the group loses money by making a bad investment decision, it can lead to bad blood, blame game and name-calling among the members.

  • Time and money required

Participating in an investment club means that you’ll be obligated to remit some cash after a certain period of time to assist the group realize its objectives.

Even though you’ll theoretically gain from this investment, the obligation to pay it religiously after a certain period of time can prove to be a financial burden in times of your rainy day.

More so, you need to devote your time to attend meetings and fulfill other tasks you’ve been assigned by the group.


Considering joining?

If you want to start participating in an investment club, you need to do a thorough background check and ascertain whether it’s something you really need.

For example, you need to analyze your current worth, annual income and expenses, ability to take risks, and personal investment goals.

You also need to know whether the people you want to trust with your investments share the same visions and aspirations as you do.

You should only join after you’ve convinced yourself that it is something for you. If you start participating in an investment club blindly, you may regret the decision you took.

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Should I Put My Money in the Bank or the Stock Market?

If you’ve saved up some extra money, it’s important for your financial goals to put it in the right account. While it’s tempting to just leave everything in the bank, you might be better off in the long-term by investing some money in the stock market. Let’s take a look at what you get out of either account so you can make a more informed decision about where to put your savings.

Return

When you put your money in the bank, it doesn’t really grow in value. The current interest rate on checking and savings account is so low it’s barely noticeable. When you consider the value you lose each year from inflation, your annual return in a bank account might actually be negative. If you’re trying to grow your money for the future, you won’t get there in a bank account.

The stock market on the other hand averages very high growth. According to the Federal Reserve Board, the stock market has grown by an average 10% per year over the past 50 years. This is much higher than the rate of inflation and will grow your savings significantly over time.

Risk

While stocks average a high return, they are risky assets. This means you can’t predict what you will earn in the stock market and it is possible to lose money. Some years you will earn a lot while other years you will lose a lot. All you can tell about the stock market is that over many years, it will grow your savings. If you are concerned about protecting your money for the short-term, it is not a good place for your money.

A bank account is very safe. Putting your money here is risk-free. You know exactly how much you will earn each year and cannot lose money. Even if your bank goes bankrupt, your deposits are insured by the government and you will be paid back in full. As a result, putting your money in the bank is much safer than the stock market.

Access

Both a bank account and the stock market give you easy access to your money. If you want to take money out of the bank you can just make a withdrawal. With stocks, you can sell shares and get your money out within a few days.

However, while stocks give you easy access to your money, you still shouldn’t depend on this account for short-term needs. If the market crashes right before you need money, you’ll only get a fraction of your money out. This is another reason why a bank account is a better short-term account.

Bottom Line

The stock market and a bank account have opposite separate strengths and weaknesses. As a result, a good financial plan makes use of both of them. Money that you need for the near future like your spending money and your emergency fund should be kept in the bank. Savings for your long-term goals like retirement should be put in the stock market because they will never grow in a bank account.

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Don’t Just Blame the Markets

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I have come across a lot of individuals who have been the victims of the financial losses owing to stock trading. And their common fixation to explain their losses is to blame the markets.
Sorry! But that’s not the correct thing to do. The problem lies at the investors end as well and to prevent any future mishaps, we need to understand the problem and take the responsibility.

There is something about the stock markets that attracts and fascinates a lot of individuals and compels them to try their luck at the bourses. It’s almost like the Hollywood dream that a lot of youngsters live with. Though both of these dreams are different in several ways, the key motivation behind these dreams is big money and that too the quick one. The overwhelming perception that the individuals have about the markets is that of a dollar printing machine, thanks to the marketing gimmicks of brokers. To top that movies based on Wall Street themes have further added glamour to the markets.

The basic human psychology of herd mentality supplemented with all the above discussed factors lead to unprepared individuals burning their hands. And this, in turn results into frustrated traders with heavy losses blaming the markets for the mess they are into.

Being a financial market professional, I feel that the reaction of people biased towards blaming the markets for the losses is not completely justified. I am not here to play the blame game here, rather I would like to help you in understanding the basics and the checklists that are must before you enter the stock markets.

Basically stock markets are a place where shares of various public companies are bought and sold. The purpose of stock markets is to provide a market place for shareholders to trade their ownership in the firms. Remember that owning a stock makes you the part owner of the firm and thus you are effectively buying a business.

Now there are two basic categories of individuals who participate in the markets. These are day traders and long term investors. Investors enter the markets for longer duration and they generally look for dividend income and long term capital gains. They invest in the growth prospects and profitability of companies. This can also be achieved by some indirect and more professional methods of investments like via mutual funds, ETFs etc.

Day trading refers to buying and selling of stocks on intraday basis. This is where the real risk lies. This can be very rewarding but at the same time highly risky. And if you don’t have the risk appetite you should avoid putting a large part of your hard earned savings into day trading.

In fact the best way for wealth building is to go for mutual funds or ETFs and have patience. It’s not that day trading is a complete negative territory but for small investors and misguided individuals, I would suggest keeping one’s expectations practical and grounded. Even if allocate some of your portfolio to day trading or short term trading, make sure you follow strict stop loss and other measures to keep your losses within your appetite.

It’s in the best interest of the investors to do their research, understand the involved risks and then take the leap. It’s better to be prepared and well informed rather than blaming the markets. If the bee stings you, it’s not the fault of the bee hive. Use proper precautions and you are sure to enjoy the honey.

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5 Laws to be respected when trading forex

Forex trading and particularly online forex trading became nowadays a sort of new El Dorado, the heaven of those stressing to become rich overnight. But this is just an appearance, a Morgana Girl, because trading is far away of being an easy and superficial activity, as it implies lots of hard work, extensive study, practice – most of the times- years of practice, psychological skills and finally but not the last, money to invest. If you want to trade forex either you treat it as a profession and make all the necessary effort in order to succeed and achieve your profit goals and dedicate years to this activity, either you stay out because you are losing your time.

If you consider this activity interesting enough to make such effort than you have to respect religiously the following unwritten laws of trading:

Draw a trading strategy

The trading strategy is the foundation of the trading activity. The first major phase is to establish a trading strategy according to the amount you have to invest, your style, your risk propensity, your expectations. You have to study the commonly used instruments for trading: indicators, candlesticks, charts, timeframes, trends and of course test and backtest different strategies that successful traders utilize.

Start small

This is a golden rule. No matter the amount of money you want to invest, till you earn enough experience, start small, because in the same way you can lose hundreds, or thousands or hundreds of thousands. Use a mini account to earn your experience, but without losing a fortune. A demo account can be useful at the very beginning for about a month till you get familiar with the tools, but not more, after that a mini account is more convenient and more appropriate for the learning process acceleration.

Don’t use more than 5% of your capital in a trade

Money Management rules will impact heavily on your profitability, because this is the way you can have some control over the risk you assume in the markets. Do not increase the volume when you lost several trades in a row, diminish it and never surpass the level of 5 % of the capital for one opened position. Respecting this rule will keep you in the markets for a longer period of time.

Always use stop loss

Stop loss is another way of controlling the risk, it helps cutting losses and avoid larger prejudice. While gaining experience you will find out that using the stop loss is more advantageous than not using it. So use it from the start and don’t lose precious time to verify this theory.

Always respect your strategy

Respecting the strategy in a perfect manner is another capital phase. Anything but perfect execution will be penalized in the markets. Automated trading may be of help but only if it’s tailored upon your defined strategy, not some expert adviser freely available on the web. It will take time and practice to overcome this phase, but once realized the success is close, very close.

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